Case Statement
Southwest Airlines has been known as an airline that offers cheap flights to almost anywhere in the country, however the problem has been seat selection with never being able to select where you want to sit; you are subject to first come, first serve.
Vision and Mission evaluation
Vision Statement: To become the world’s most loved, most flown, and most profitable airline.
Southwest’s vision statement has been done very well. They have made it short and to the point. This is something that all of their employees will be able to understand and remember. The only concern I see is they may want to show more of their family push that they have been recently working towards.
Mission Statement: The mission of Southwest Airlines is dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit. We are committed to provide our Employees a stable work environment with equal opportunity for learning and personal growth.
Mission statement matrix
Customers
Yes
Products or Services
Yes
Markets
No
Technology
No
Survival, Growth, and profitability
Yes
Philosophy
Yes
Self-Concept
Yes
Public Image
Yes
Employees
Yes
Their mission statement is also done very well, although they are missing some key components that could strengthen it. The initial key component that is being used is customers specifically when they mention their customer service. The products or services, philosophy, and self-concept are all mentioned when they are talking about their warmth and friendliness. The second sentence is dedicated to not only their employees but also their survival, growth, and profitability. Southwest is missing markets and technology in their mission statement. If Southwest was able to mention either of these items in their mission statement it would strengthen the statement. They could this by mentioning where they fly to and the advancements that Southwest brings to the airline industry.
Milestones
Southwest Airlines was created on March 9, 1967. They initially only flew in Texas areas until branching out to other states and locations in 1975 (Southwest, 2018). They use only Boeing 737 aircrafts and have approximately 700 of them in their fleet. Southwest currently flies to 101 different locations including 40 different states. They also fly to 8 near-international countries which include Mexico, Jamaica, Bahamas, Aruba, Dominican Republic, Costa Rica, Belize and Cuba. Their stock market name is LUV after their employee loyalty program. Southwest’s loyalty program has a very good program that rewards all of their customers. They reward you for not only ticket purchases but other purchases you can make with their credit card.
Key Milestones in Southwest History
1971 – Southwest starts by flying between Dallas, Houston, and San Antonio.
1973 – Southwest makes a profit, which continues for the next 36 years straight.
1982 – Starts flying out of Texas.
1996 – Expands to Florida.
2005 – Begins travel to Hawaii.
2014 – Southwest’s first international departure, to three Caribbean locations.
2017 – Southwest is named to FORTUNE's 2017 list of World's Most Admired Companies, marking the company's 23rd consecutive year on the list. Southwest ranked #8, and is the only commercial airline among the Top 10.
External Assessment Matrix
Opportunities
Weight
Rating
Weighted Score
1
Good advertising
0.10
4
0.40
2
Safety record
0.10
4
0.40
3
Loyalty of customers
0.05
3
0.15
4
Loyalty of employees
0.05
3
0.15
5
Prices
0.08
4
0.32
6
Online ticket sales
0.03
3
0.09
7
Don’t have to pay to change reservations
0.02
3
0.06
8
Shorter trips
0.03
3
0.09
9
Loading planes
0.03
3
0.09
10
Wi-Fi usage on airplanes
0.06
4
0.24
Total
1.99
Threats
Weight
Rating
Weighted Score
1
Lots of competition
0.10
4
0.40
2
Unstable gas prices
0.05
2
0.10
3
Less need to travel due to better technology
0.03
2
0.06
4
Limited international
0.07
3
0.21
5
Terrorism
0.02
3
0.06
6
Low economy
0.02
1
0.02
7
Unruly passengers
0.03
2
0.06
8
No preferential seating
0.03
4
0.12
9
Only one type of plane being used
0.08
2
0.16
10
Airport security
0.02
3
0.06
1.25
Total
1.00
3.24
Overall Southwest shows that they are a great company to support. Their external assessment rating is overall very high. Some of their greatest opportunities are their great advertising. When you see their color scheme on an airplane you automatically know who it is. They have the “want to get away” slogan that shows someone that makes a huge mistake and then they just want to crawl away from what they said or did. Their safety record is phenomenal. Keeping people safe has been a mainstay at Southwest since their inception. In April of this year they had their first fatality in their entire 47 years of existence. Southwest has also done a phenomenal job of keeping the pricing of their tickets low. You are able to get to most major cities for under $200 one-way. Wi-Fi usage on airplanes is a great feature for their customers that want to keep children entertained and also for the people who are doing work on the trip. Although there are some things that Southwest can work on to improve, such as their limited international flying. If you are looking to travel to Europe, Asia, Australia, or Africa you are going to need to use a different airline. Also the amount of competitors that they have is a struggle for Southwest. There are currently over 365 different airlines in the world (Wikipedia, 2018). Although the majority of those are airlines that only fly locally. Of the airlines that fly consistently to the same places as Southwest there are approximately 18 major carriers.
Internal Assessment Matrix
Strengths
Weight
Rating
Weighted Score
1
Strong Financial record
0.10
4
0.40
2
Good relationship with Unions
0.07
4
0.28
3
Flight attendant pay
0.03
3
0.09
4
Efficient travel procedures
0.02
3
0.06
5
Reliable Suppliers
0.03
3
0.09
6
Free baggage
0.04
4
0.16
7
Longevity in business
0.04
3
0.12
8
Website usage
0.07
4
0.28
9
Amount of passengers using
0.10
3
0.30
10
Diverse upper management
0.10
4
0.40
Total
2.18
Weaknesses
Weight
Rating
Weighted Score
1
Employees in a union
0.10
1
0.10
2
Unruly passengers
0.02
2
0.04
3
Only one class of seating is offered
0.02
2
0.04
4
Low number of morning flights
0.02
1
0.02
5
Doesn’t fly to all airports
0.03
2
0.06
6
No entertainment on planes
0.03
1
0.03
7
No meals on planes
0.03
1
0.03
8
Better technology, leads to less needed to travel
0.10
1
0.10
9
Limited amount of storage on planes
0.02
2
0.04
10
Limited diversification
0.03
1
0.03
0.46
Total
1.00
Average
2.41
Once again Southwest shows that they are a great company to work for. They have some key strengths this is really pushing this. First is their strong financial record, Southwest has had consistent revenue increase year on year (Kelly, 2018). The other biggest rated strength for them is the amount of passengers that used their service. In 2016 they carried over 151 million passengers the next highest was American Airlines at 144 million passengers (Curley, 2017). Southwest has a very diverse upper management when looking at their upper management they have women and men of all different races in their management team (Southwest, 2018). There are numerous weaknesses for Southwest. The first is that they have employees in a union. Southwest has to negotiate with several different unions such as The Transport Workers Union and The Aircrafts Mechanics Fraternal Association. They are in good standing currently with both these major unions but there is always a chance things can occur. The next largest issue was the use of better technology. Business professionals are able to communicate easier via Skype and face-time then they could 5 years ago.
Financial Ratios
Southwest
Industry
Debt/Equity Ratio
0.34
1.21
Current Ratio
0.67
0.53
Quick Ratio
0.55
0.39
Looking through some of the different financial ratios they look to be in a better condition than their competitors are. Such as the debt/equity ratio this is showing a significant lower number than the industry standard, and that they are a more financially stable company with very little debt. Their current ratio is higher than the industry standard which is showing that they are able to pay off their short-term liabilities at a quicker rate than their competitors. The quick ratio is showing that Southwest is in better shape than the industry in terms of sales.
SWOT Analysis
Southwest throughout this case study is showing they are a very profitable company that looks and cares about both their employees and their customers. Southwest has been doing an excellent job at being innovative and looking ahead to any issues that may arise. Such as how being proactive with the loading of planes. This is at times thought to be a downfall but they are able to keep costs to the customers down, able to keep customers satisfied by their seating choice, and making sure that all of their planes are full. Their greatest strength and opportunity is the safety of their customers. Southwest has shown remarkable ability to adapt to changes and ensure that their customers make it to their destination in a time frame that is suitable to them.
Industry Analysis
There are five key forces that can effects competition within any industry. These are called Porter’s five forces model. Those forces are rivalry among competing firms, potential entry of new competitors, bargaining power of suppliers, potential development of substitute products, and bargaining power of consumers.
Rivalry of competing firms – In the airline industry the rivalries with other companies are very much known and widely publicized. Southwest has a total of 365 different competitors (Wikipedia, 2018). Some of these are stronger competitors and have been in business since Southwest’s inception, such as Delta, United, and American. Besides the larger companies they also have to contend with newer airlines that are able to meet Southwest’s lower fares, such are Frontier and Spirit (Loyd, 2015).
Bargaining power of suppliers – Southwest is notorious for only having one supplier of their planes. Southwest only uses Boeing 737’s for their fleet (Stevenson, 2012). Boeing knowing this can alter their prices to reflect when Southwest needs additional parts or more planes. The biggest drawback in the airline industry is the fuel that is being consumed. A recent article on CNBC predicts that the cost of airline fuel will continue to rise and this should in turn push the prices of seats up (Josephs, 2018).
Bargaining power of customers – The bargaining power of the buyer is beneficial to the customer. The customer can pick and choose which airline they want to use. The other companies have teamed up with larger search engines such as Priceline.com to enhance their customers choosing them as their flight source. Also this makes it easier for the customer to compare prices to what is conducive to what they want.
Threat of new entrants – The threat of new airlines coming into existence is very low. There has not been a consistent airline to come into existence and stay for over 10 years. The reason is because there are several things that new companies have to contend. They need to be able to meet all the financial demands, the government regulations, the numerous competitors, and different operational issues (McGee, 2017).
Threat of substitute products – There are several different types of substitute products that customers can use. These include busses, trains, cars, and numerous other modes of transportation. The biggest difference with this is although you will be paying a lot less, the time it takes to get there is extensively longer. Customers are able to enjoy more of the wilderness and country as long as there is no need to rush to get there.
Financial Analysis
Southwest has overall been a very strong business. They have had consistent sales growth from at least 2013 averaging 4.59%. Southwest revenue in 2013 was 17.7 billion dollars and in 2017 they reported 21.17 billion dollars in revenue (Southwest, 2018). Since almost their inception they have shown an increase in revenue year on year, which is consistent with how they have been performing for the last 45 years, (Kelly, 2018). The gross profit margin and net profit margin also shows that Southwest is very profitable and able to have sustainable revenue compared to the industry standard. They also show on average that Southwest is paying their employees considerably better than their competitors. Southwest’s return on assets is again much greater than the industry standard showing that they are utilizing their planes and other assets better than other airlines. All of these figures show that Southwest when comparing to the industry standard, as is shown below, is an airline that is in a lot better position financially than many of their competitors. (MSN, 2018)
Ratios
Southwest
Industry Standard
Current Ratio
0.67
0.51
Quick Ratio
0.55
0.36
Debt to Equity Ratio
0.34
1.09
Return on Capital
29.72%
13.56%
Return on Assets
14.66%
6.91%
Return on Equity
40.53%
32.45%
Dividend payout ratio
7.88
Employee Avg. Yearly Income
$63,240
$27,980
Leverage Ratio
2.65
4.99
Gross margin
69.51
37.45
Net profit margin
16.99
8.47
Inventory Turnover
16.5
25.77
Raising Short-Term Capital
Some key ratios that are being used to show how Southwest does with raising short term capital are the current ratio and the quick ratio. The current ratio is considerably better than the industry at 0.67 and 0.51 respectively. This shows that they are in a better point to pay off short term capital needs. The quick ratio is closer to the industry standard, but once again they are in a better position than their competitors. These both show that compared to the industry standard Southwest is able to cover any immediate needs they may have in raising short term capital.
Raising Long-Term Capital
Southwest has plenty of opportunities to raise their long term capital. This is evident in both the debt to equity ratio and the leverage ratio. Southwest’s debt to equity ratio is significant lower than the industry standard. That is one of the biggest differences compared to the industry standards 0.34 to 1.09 respectively. This shows that Southwest is able to pay off any debt with little to no problems. Another significant ratio that Southwest has when comparing to the industry standard is the leverage ratio. They are almost half of what the industry is at 2.65 compared to 4.99. This shows that Southwest is not using as much debt to finance their assets. Both of these ratios show that Southwest has a good handle on their long term capital.
Working Capital
According to Southwest’s 2017 financial statement, they “prefer to have a working capital in the deficit.” They have stated that this is common in the airline industry due to several different accounts they have setup. One of these is the air traffic liability account which helps with frequent flyer promotions that they give out (Annual Report, 2017).
Capital Budgeting
Southwest seems to have good capital budgeting procedures that they are using. Their debt to equity ratio is greater than the industry standard at 0.34 to 1.09 respectively. Also according to their yearly financial statements Southwest has seen a drop in their net present value over the last 3 years.
Dividend Payouts
Southwest’s dividend payouts have increased year over year. This increase has been approximately 25% compared to the previous year (Annual Report, 2017). Their dividend payout ratio shows that this has been a very profitable and lucrative business to get into. They recently just announced that they have increased their dividend payout to 28% for this past year. This shows their relationship with their stockholders is in good standing. Anytime Southwest is able to maintain a large payout to their investors this strengthens their faith in your company.
Financial Managers
Southwest’s financial mangers seem to be doing an excellent job. Their return on assets, return on equity, and return on capital all show a better relation than the industry standard. The return on assets is 14.66% compared to the industry standard of 6.91%. The return on equity is 40.53% compared to the industry standard of 32.45%. The return on capital is 29.72% compared to the industry standard of 13.56%. These show that the management team for Southwest is able to make their money be very profitable, which in turn makes Southwest more successful.
Competitive Strategies
The SWOT matrix was decided to be used as this is the most common and the easiest to see how they are matching up and what Southwest is able to achieve by achieving this different strategies. It was noted that there are 15 different strategies that Southwest should consider if they are looking to make improvements to their business. There are four from the SO strategies, WO strategies, ST strategies, and only 3 from WT strategies.
SO Strategies
Southwest has several potential strategies that they could accomplish when they combine their strengths and opportunities. The first is to advertise how much cheaper it is flying with Southwest compared to their competitors. Currently Southwest shows how much their flights cost with their “Wanna, get away” campaign. The thing that is missing is comparing this to their major competitors such as Delta, United, and American Airlines.
Employees are a very critical aspect of every business. A successful business not only hires the best employees but also promotes those employees to better their company. The strategy would help their relationship with their union members already. If they are able to promote their employees that were already in the union, the promoted employee will have a better understanding of the employee struggles.
Southwest is one of the only major airlines that you can only book their flights on their website. Southwest can make this website easier to use and manage. One key thing would be to let their customers be able to type in any city and give airports that are closest to it. The next thing would be to use geolocation that will tell the website where you are located. This could help people not needing to type in their city. When putting in dates of when you want to leave give different options for when to fly back and how prices might alter from the changes you put in.
A large confusion for many of Southwest’s customers is how Southwest loads their planes. This can become strength for them as long as they are communicating this to their customers. They can accomplish this communication lack by letting their customers know prior to purchasing their tickets. The customers can check in up to 24 hours ahead of time the sooner that they check in will correlate with when they can load a plane(Southwest, 2018). This can also be accomplished by emailing/texting their customers ahead of when their check in time is.
WO Strategies
Southwest does have some key weaknesses that and utilize their opportunities to achieve a good strategy to combat them. The first would be during their next time they are in negotiations to publicize their employees how much they care about them and for them. To do this they could advertise to their customers of how much they care about their employees and show employees that have been with the company a long time. Also once the contract is ratified make a very public announcement of how much they appreciate their employees and all of the hard work that they put forward every day.
People are always trying to get places quicker. Southwest is known for offering short trips. By Southwest offering flights for their customers to “get away” and quicker will allow them to not have to listen if they have customers that are not following the guidelines that Southwest presents to them. This would also help combat the problem of Southwest not offering food or entertainment on their flights. Southwest could show how someone is shoveling snow in Michigan and then later that night, sitting on the beach in Florida.
Southwest needs to help their customers believe that no matter whom they are that they can fly on their planes. Advertising a business professional working on a project next to a child that is pretending they are piloting the plane, which is sitting behind a celebrity such as Tom Brady that is looking out the plane window after the Super Bowl loss. Stating then that there is no business class or first class we are all trying to get away from something.
Southwest is known that they don’t fly very early or late in the day. They could show a person waking up well rested, go eat breakfast with their spouse and kids. Then go and get dressed and come out in a pilot’s uniform, with a bag packed and ready to go. Get to the airport and pass by other pilots with their competitors that are yawning and looking as they are going to fall asleep. Then have a slogan come across the screen saying that we don’t fly early because we want to you get there safe.
ST Strategies
One of Southwest’s largest threats is their lack of international flights. They currently do go to some closer international countries such as Costa Rica and Mexico. They are missing out on traveling to the larger international countries such as England. They can assist in doing this because they have had a strong financial background and would be able to purchase larger planes. They have been in business a long time and need to start to look at different options for them.
Southwest has always been known as a company that you can get cheaper flights through. The big threat that they are going to have to deal with is business professionals that don’t need to fly to visit their customers because they can interact with them over the internet. So offering better deals from big cities to be able to fly to and able to get back home quickly. They could offer this program for a low price and promote it to the business professionals.
When trying to figure out how much money will be spent you want to look at all of your expenses. One of Southwest’s biggest fluctuating expenses is the price of fuel. Southwest could fight against this by having numerous amounts of fuel holdings. When the price starts to drop they can buy more of the cheaper amount of fuel and store it. They can then use this stored fuel when the price goes up.
Southwest is known as a company that is very efficient when loading people onto planes. They have a first come first serve when they are checking people in. If they are able to push their employees to getting the planes loaded faster, this will increase their ability to get the plane in the air faster.
WT Strategies
A large weakness and threat for Southwest is they don’t travel to all locations. They are limited as to their international flights and don’t travel to all locations in the United States. This does turn off people from choosing their service because since they don’t travel to those locations. Southwest to combat this concern should advertise and explain to people that they don’t travel to all locations to keep the prices down. If they were to travel to all these locations their prices will rise.
Going through this project I have to walk away from my family and go to a secluded area to work on it. There are at times when a business professional knows that they have a lot of work. They also know that one place they can work on without being interfered is on the plane. Unfortunately Southwest doesn’t offer a business class. Southwest should look at using larger planes that will have business class then charge more for those customers that want to sit in that section of the planes.
Strategy Selection
There were several different strategies that Southwest could look at in order to achieve better and stronger financial performances. The first strategy was making Southwest website easier to use. By doing this Southwest could help their customers in purchasing tickets and make it so they are a more reliable supporter. The second strategy was promoting capable employees. This would help promote their employees and show that they want to improve the company not only from within but also improve their credibility with their union management. But these strategies would not answer the initial case problem of increasing revenue and pleasing customers. The strategy that was ranked the highest in the QSPM was showing their customers that they belong in any seat. This strategy will give numerous benefits to Southwest. By doing this Southwest can utilize their advertising skills and show customers that are getting on their plane with several other types of customers. They could show business professionals getting on planes with a family that is going on vacation. All of these people could sit anywhere, could sit in any place and enjoy the ride.
Implementation Plan
Expanding the customers that use Southwest and letting them know that they can sit anywhere will be a struggle. Southwest’s current Chief Executive Officer is Gary Kelly and his management team has shown that they are very good innovators over the last several years. They are always staying ahead of the rest of the airline industry. There are several items that Southwest can do to implement this strategy and ensure that the strategy will succeed. The biggest struggle that Southwest will face in order to succeed is to get a celebrity that will be willing to be in the commercial.
Marketing
The marketing for Southwest has always been a leader in the airline industry. Southwest’s current chief marketing officer is Ryan Green and he will be the main person to go to in order to implement this strategy. Southwest will need to have numerous people beyond Ryan Green to accomplish this task. More than likely this should be done by some of Southwest’s more experienced employees that have worked well with making the current commercials. Southwest will also need to achieve some professional relationship with whichever celebrity that Southwest is able to get to be in the commercial.
Operations
There in not much that the operations team will have to do. The main thing that the operations team will have to do is supporting the marketing team. The operations team will be led by Alfred Smith whom is the current senior vice president of operations. Alfred will need to be able to supply any needed items such as planes, flight attendants, or pilots. Also the operations team should help with the promoting of the commercial. Specifically if they are asked by their customers if they were the one that was waiting on the celebrity how it was to interact with them.
Finance
The finance team will need to be heavily involved with the marketing team to ensure that they have everything they need. The finance team will be led by Southwest’s Chief Financial Officer Tammy Romo. Southwest could use debt, stock, or combination of both of them in order to obtain the necessary cost for the commercial. The major cost of this commercial will be getting the endorsement deal of the celebrity of their choosing. Currently Tom Brady makes about a $7 million a year for his endorsements (Chemi, 2015). The commercial with him may be a little higher than Southwest is willing to spend. Other celebrities vary on their pricing and what is being asked of them.
Below is an EPS/EBIT that will show which option will be best for raising the funds needed. It will be shown using the Tom Brady in the commercial.
Common Stock Financing
Normal
Recession
Boom
EBIT
$5,000,000,000
$7,000,000,000
$9,000,000,000
Interest
0
0
0
EBT
$5,000,000,000
$7,000,000,000
$9,000,000,000
Taxes
1,850,000,000
2,590,000,000
3,330,000,000
EAT
3,150,000,000
4,410,000,000
5,670,000,000
# of shares
588,450,527
588,450,527
588,450,527
EPS
$5.35
$7.49
$9.64
Debt Financing
Normal
Recession
Boom
EBIT
$5,000,000,000
$7,000,000,000
$9,000,000,000
Interest
25,000,000
25,000,000
25,000,000
EBT
4,975,000,000
6,975,000,000
8,975,000,000
Taxes
1,840,750,000
2,580,750,000
3,320,750,000
EAT
3,134,250,000
4,394,250,000
5,654,250,000
# of shares
579,803,000
579,803,000
579,803,000
EPS
$5.41
$7.58
$9.75
Looking at the above graphs Southwest should use the Debt financing when they need to pay out for this commercial. Southwest will not accumulate a lot of debt when they do have to make this commercial as the cost of doing this is not that great. Although if Southwest wanted to utilize this more often and have more celebrities, this will only boost Southwest as a company.
Southwest Airlines has been known as an airline that offers cheap flights to almost anywhere in the country, however the problem has been seat selection with never being able to select where you want to sit; you are subject to first come, first serve.
Vision and Mission evaluation
Vision Statement: To become the world’s most loved, most flown, and most profitable airline.
Southwest’s vision statement has been done very well. They have made it short and to the point. This is something that all of their employees will be able to understand and remember. The only concern I see is they may want to show more of their family push that they have been recently working towards.
Mission Statement: The mission of Southwest Airlines is dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit. We are committed to provide our Employees a stable work environment with equal opportunity for learning and personal growth.
Mission statement matrix
Customers
Yes
Products or Services
Yes
Markets
No
Technology
No
Survival, Growth, and profitability
Yes
Philosophy
Yes
Self-Concept
Yes
Public Image
Yes
Employees
Yes
Their mission statement is also done very well, although they are missing some key components that could strengthen it. The initial key component that is being used is customers specifically when they mention their customer service. The products or services, philosophy, and self-concept are all mentioned when they are talking about their warmth and friendliness. The second sentence is dedicated to not only their employees but also their survival, growth, and profitability. Southwest is missing markets and technology in their mission statement. If Southwest was able to mention either of these items in their mission statement it would strengthen the statement. They could this by mentioning where they fly to and the advancements that Southwest brings to the airline industry.
Milestones
Southwest Airlines was created on March 9, 1967. They initially only flew in Texas areas until branching out to other states and locations in 1975 (Southwest, 2018). They use only Boeing 737 aircrafts and have approximately 700 of them in their fleet. Southwest currently flies to 101 different locations including 40 different states. They also fly to 8 near-international countries which include Mexico, Jamaica, Bahamas, Aruba, Dominican Republic, Costa Rica, Belize and Cuba. Their stock market name is LUV after their employee loyalty program. Southwest’s loyalty program has a very good program that rewards all of their customers. They reward you for not only ticket purchases but other purchases you can make with their credit card.
Key Milestones in Southwest History
1971 – Southwest starts by flying between Dallas, Houston, and San Antonio.
1973 – Southwest makes a profit, which continues for the next 36 years straight.
1982 – Starts flying out of Texas.
1996 – Expands to Florida.
2005 – Begins travel to Hawaii.
2014 – Southwest’s first international departure, to three Caribbean locations.
2017 – Southwest is named to FORTUNE's 2017 list of World's Most Admired Companies, marking the company's 23rd consecutive year on the list. Southwest ranked #8, and is the only commercial airline among the Top 10.
External Assessment Matrix
Opportunities
Weight
Rating
Weighted Score
1
Good advertising
0.10
4
0.40
2
Safety record
0.10
4
0.40
3
Loyalty of customers
0.05
3
0.15
4
Loyalty of employees
0.05
3
0.15
5
Prices
0.08
4
0.32
6
Online ticket sales
0.03
3
0.09
7
Don’t have to pay to change reservations
0.02
3
0.06
8
Shorter trips
0.03
3
0.09
9
Loading planes
0.03
3
0.09
10
Wi-Fi usage on airplanes
0.06
4
0.24
Total
1.99
Threats
Weight
Rating
Weighted Score
1
Lots of competition
0.10
4
0.40
2
Unstable gas prices
0.05
2
0.10
3
Less need to travel due to better technology
0.03
2
0.06
4
Limited international
0.07
3
0.21
5
Terrorism
0.02
3
0.06
6
Low economy
0.02
1
0.02
7
Unruly passengers
0.03
2
0.06
8
No preferential seating
0.03
4
0.12
9
Only one type of plane being used
0.08
2
0.16
10
Airport security
0.02
3
0.06
1.25
Total
1.00
3.24
Overall Southwest shows that they are a great company to support. Their external assessment rating is overall very high. Some of their greatest opportunities are their great advertising. When you see their color scheme on an airplane you automatically know who it is. They have the “want to get away” slogan that shows someone that makes a huge mistake and then they just want to crawl away from what they said or did. Their safety record is phenomenal. Keeping people safe has been a mainstay at Southwest since their inception. In April of this year they had their first fatality in their entire 47 years of existence. Southwest has also done a phenomenal job of keeping the pricing of their tickets low. You are able to get to most major cities for under $200 one-way. Wi-Fi usage on airplanes is a great feature for their customers that want to keep children entertained and also for the people who are doing work on the trip. Although there are some things that Southwest can work on to improve, such as their limited international flying. If you are looking to travel to Europe, Asia, Australia, or Africa you are going to need to use a different airline. Also the amount of competitors that they have is a struggle for Southwest. There are currently over 365 different airlines in the world (Wikipedia, 2018). Although the majority of those are airlines that only fly locally. Of the airlines that fly consistently to the same places as Southwest there are approximately 18 major carriers.
Internal Assessment Matrix
Strengths
Weight
Rating
Weighted Score
1
Strong Financial record
0.10
4
0.40
2
Good relationship with Unions
0.07
4
0.28
3
Flight attendant pay
0.03
3
0.09
4
Efficient travel procedures
0.02
3
0.06
5
Reliable Suppliers
0.03
3
0.09
6
Free baggage
0.04
4
0.16
7
Longevity in business
0.04
3
0.12
8
Website usage
0.07
4
0.28
9
Amount of passengers using
0.10
3
0.30
10
Diverse upper management
0.10
4
0.40
Total
2.18
Weaknesses
Weight
Rating
Weighted Score
1
Employees in a union
0.10
1
0.10
2
Unruly passengers
0.02
2
0.04
3
Only one class of seating is offered
0.02
2
0.04
4
Low number of morning flights
0.02
1
0.02
5
Doesn’t fly to all airports
0.03
2
0.06
6
No entertainment on planes
0.03
1
0.03
7
No meals on planes
0.03
1
0.03
8
Better technology, leads to less needed to travel
0.10
1
0.10
9
Limited amount of storage on planes
0.02
2
0.04
10
Limited diversification
0.03
1
0.03
0.46
Total
1.00
Average
2.41
Once again Southwest shows that they are a great company to work for. They have some key strengths this is really pushing this. First is their strong financial record, Southwest has had consistent revenue increase year on year (Kelly, 2018). The other biggest rated strength for them is the amount of passengers that used their service. In 2016 they carried over 151 million passengers the next highest was American Airlines at 144 million passengers (Curley, 2017). Southwest has a very diverse upper management when looking at their upper management they have women and men of all different races in their management team (Southwest, 2018). There are numerous weaknesses for Southwest. The first is that they have employees in a union. Southwest has to negotiate with several different unions such as The Transport Workers Union and The Aircrafts Mechanics Fraternal Association. They are in good standing currently with both these major unions but there is always a chance things can occur. The next largest issue was the use of better technology. Business professionals are able to communicate easier via Skype and face-time then they could 5 years ago.
Financial Ratios
Southwest
Industry
Debt/Equity Ratio
0.34
1.21
Current Ratio
0.67
0.53
Quick Ratio
0.55
0.39
Looking through some of the different financial ratios they look to be in a better condition than their competitors are. Such as the debt/equity ratio this is showing a significant lower number than the industry standard, and that they are a more financially stable company with very little debt. Their current ratio is higher than the industry standard which is showing that they are able to pay off their short-term liabilities at a quicker rate than their competitors. The quick ratio is showing that Southwest is in better shape than the industry in terms of sales.
SWOT Analysis
Southwest throughout this case study is showing they are a very profitable company that looks and cares about both their employees and their customers. Southwest has been doing an excellent job at being innovative and looking ahead to any issues that may arise. Such as how being proactive with the loading of planes. This is at times thought to be a downfall but they are able to keep costs to the customers down, able to keep customers satisfied by their seating choice, and making sure that all of their planes are full. Their greatest strength and opportunity is the safety of their customers. Southwest has shown remarkable ability to adapt to changes and ensure that their customers make it to their destination in a time frame that is suitable to them.
Industry Analysis
There are five key forces that can effects competition within any industry. These are called Porter’s five forces model. Those forces are rivalry among competing firms, potential entry of new competitors, bargaining power of suppliers, potential development of substitute products, and bargaining power of consumers.
Rivalry of competing firms – In the airline industry the rivalries with other companies are very much known and widely publicized. Southwest has a total of 365 different competitors (Wikipedia, 2018). Some of these are stronger competitors and have been in business since Southwest’s inception, such as Delta, United, and American. Besides the larger companies they also have to contend with newer airlines that are able to meet Southwest’s lower fares, such are Frontier and Spirit (Loyd, 2015).
Bargaining power of suppliers – Southwest is notorious for only having one supplier of their planes. Southwest only uses Boeing 737’s for their fleet (Stevenson, 2012). Boeing knowing this can alter their prices to reflect when Southwest needs additional parts or more planes. The biggest drawback in the airline industry is the fuel that is being consumed. A recent article on CNBC predicts that the cost of airline fuel will continue to rise and this should in turn push the prices of seats up (Josephs, 2018).
Bargaining power of customers – The bargaining power of the buyer is beneficial to the customer. The customer can pick and choose which airline they want to use. The other companies have teamed up with larger search engines such as Priceline.com to enhance their customers choosing them as their flight source. Also this makes it easier for the customer to compare prices to what is conducive to what they want.
Threat of new entrants – The threat of new airlines coming into existence is very low. There has not been a consistent airline to come into existence and stay for over 10 years. The reason is because there are several things that new companies have to contend. They need to be able to meet all the financial demands, the government regulations, the numerous competitors, and different operational issues (McGee, 2017).
Threat of substitute products – There are several different types of substitute products that customers can use. These include busses, trains, cars, and numerous other modes of transportation. The biggest difference with this is although you will be paying a lot less, the time it takes to get there is extensively longer. Customers are able to enjoy more of the wilderness and country as long as there is no need to rush to get there.
Financial Analysis
Southwest has overall been a very strong business. They have had consistent sales growth from at least 2013 averaging 4.59%. Southwest revenue in 2013 was 17.7 billion dollars and in 2017 they reported 21.17 billion dollars in revenue (Southwest, 2018). Since almost their inception they have shown an increase in revenue year on year, which is consistent with how they have been performing for the last 45 years, (Kelly, 2018). The gross profit margin and net profit margin also shows that Southwest is very profitable and able to have sustainable revenue compared to the industry standard. They also show on average that Southwest is paying their employees considerably better than their competitors. Southwest’s return on assets is again much greater than the industry standard showing that they are utilizing their planes and other assets better than other airlines. All of these figures show that Southwest when comparing to the industry standard, as is shown below, is an airline that is in a lot better position financially than many of their competitors. (MSN, 2018)
Ratios
Southwest
Industry Standard
Current Ratio
0.67
0.51
Quick Ratio
0.55
0.36
Debt to Equity Ratio
0.34
1.09
Return on Capital
29.72%
13.56%
Return on Assets
14.66%
6.91%
Return on Equity
40.53%
32.45%
Dividend payout ratio
7.88
Employee Avg. Yearly Income
$63,240
$27,980
Leverage Ratio
2.65
4.99
Gross margin
69.51
37.45
Net profit margin
16.99
8.47
Inventory Turnover
16.5
25.77
Raising Short-Term Capital
Some key ratios that are being used to show how Southwest does with raising short term capital are the current ratio and the quick ratio. The current ratio is considerably better than the industry at 0.67 and 0.51 respectively. This shows that they are in a better point to pay off short term capital needs. The quick ratio is closer to the industry standard, but once again they are in a better position than their competitors. These both show that compared to the industry standard Southwest is able to cover any immediate needs they may have in raising short term capital.
Raising Long-Term Capital
Southwest has plenty of opportunities to raise their long term capital. This is evident in both the debt to equity ratio and the leverage ratio. Southwest’s debt to equity ratio is significant lower than the industry standard. That is one of the biggest differences compared to the industry standards 0.34 to 1.09 respectively. This shows that Southwest is able to pay off any debt with little to no problems. Another significant ratio that Southwest has when comparing to the industry standard is the leverage ratio. They are almost half of what the industry is at 2.65 compared to 4.99. This shows that Southwest is not using as much debt to finance their assets. Both of these ratios show that Southwest has a good handle on their long term capital.
Working Capital
According to Southwest’s 2017 financial statement, they “prefer to have a working capital in the deficit.” They have stated that this is common in the airline industry due to several different accounts they have setup. One of these is the air traffic liability account which helps with frequent flyer promotions that they give out (Annual Report, 2017).
Capital Budgeting
Southwest seems to have good capital budgeting procedures that they are using. Their debt to equity ratio is greater than the industry standard at 0.34 to 1.09 respectively. Also according to their yearly financial statements Southwest has seen a drop in their net present value over the last 3 years.
Dividend Payouts
Southwest’s dividend payouts have increased year over year. This increase has been approximately 25% compared to the previous year (Annual Report, 2017). Their dividend payout ratio shows that this has been a very profitable and lucrative business to get into. They recently just announced that they have increased their dividend payout to 28% for this past year. This shows their relationship with their stockholders is in good standing. Anytime Southwest is able to maintain a large payout to their investors this strengthens their faith in your company.
Financial Managers
Southwest’s financial mangers seem to be doing an excellent job. Their return on assets, return on equity, and return on capital all show a better relation than the industry standard. The return on assets is 14.66% compared to the industry standard of 6.91%. The return on equity is 40.53% compared to the industry standard of 32.45%. The return on capital is 29.72% compared to the industry standard of 13.56%. These show that the management team for Southwest is able to make their money be very profitable, which in turn makes Southwest more successful.
Competitive Strategies
The SWOT matrix was decided to be used as this is the most common and the easiest to see how they are matching up and what Southwest is able to achieve by achieving this different strategies. It was noted that there are 15 different strategies that Southwest should consider if they are looking to make improvements to their business. There are four from the SO strategies, WO strategies, ST strategies, and only 3 from WT strategies.
SO Strategies
Southwest has several potential strategies that they could accomplish when they combine their strengths and opportunities. The first is to advertise how much cheaper it is flying with Southwest compared to their competitors. Currently Southwest shows how much their flights cost with their “Wanna, get away” campaign. The thing that is missing is comparing this to their major competitors such as Delta, United, and American Airlines.
Employees are a very critical aspect of every business. A successful business not only hires the best employees but also promotes those employees to better their company. The strategy would help their relationship with their union members already. If they are able to promote their employees that were already in the union, the promoted employee will have a better understanding of the employee struggles.
Southwest is one of the only major airlines that you can only book their flights on their website. Southwest can make this website easier to use and manage. One key thing would be to let their customers be able to type in any city and give airports that are closest to it. The next thing would be to use geolocation that will tell the website where you are located. This could help people not needing to type in their city. When putting in dates of when you want to leave give different options for when to fly back and how prices might alter from the changes you put in.
A large confusion for many of Southwest’s customers is how Southwest loads their planes. This can become strength for them as long as they are communicating this to their customers. They can accomplish this communication lack by letting their customers know prior to purchasing their tickets. The customers can check in up to 24 hours ahead of time the sooner that they check in will correlate with when they can load a plane(Southwest, 2018). This can also be accomplished by emailing/texting their customers ahead of when their check in time is.
WO Strategies
Southwest does have some key weaknesses that and utilize their opportunities to achieve a good strategy to combat them. The first would be during their next time they are in negotiations to publicize their employees how much they care about them and for them. To do this they could advertise to their customers of how much they care about their employees and show employees that have been with the company a long time. Also once the contract is ratified make a very public announcement of how much they appreciate their employees and all of the hard work that they put forward every day.
People are always trying to get places quicker. Southwest is known for offering short trips. By Southwest offering flights for their customers to “get away” and quicker will allow them to not have to listen if they have customers that are not following the guidelines that Southwest presents to them. This would also help combat the problem of Southwest not offering food or entertainment on their flights. Southwest could show how someone is shoveling snow in Michigan and then later that night, sitting on the beach in Florida.
Southwest needs to help their customers believe that no matter whom they are that they can fly on their planes. Advertising a business professional working on a project next to a child that is pretending they are piloting the plane, which is sitting behind a celebrity such as Tom Brady that is looking out the plane window after the Super Bowl loss. Stating then that there is no business class or first class we are all trying to get away from something.
Southwest is known that they don’t fly very early or late in the day. They could show a person waking up well rested, go eat breakfast with their spouse and kids. Then go and get dressed and come out in a pilot’s uniform, with a bag packed and ready to go. Get to the airport and pass by other pilots with their competitors that are yawning and looking as they are going to fall asleep. Then have a slogan come across the screen saying that we don’t fly early because we want to you get there safe.
ST Strategies
One of Southwest’s largest threats is their lack of international flights. They currently do go to some closer international countries such as Costa Rica and Mexico. They are missing out on traveling to the larger international countries such as England. They can assist in doing this because they have had a strong financial background and would be able to purchase larger planes. They have been in business a long time and need to start to look at different options for them.
Southwest has always been known as a company that you can get cheaper flights through. The big threat that they are going to have to deal with is business professionals that don’t need to fly to visit their customers because they can interact with them over the internet. So offering better deals from big cities to be able to fly to and able to get back home quickly. They could offer this program for a low price and promote it to the business professionals.
When trying to figure out how much money will be spent you want to look at all of your expenses. One of Southwest’s biggest fluctuating expenses is the price of fuel. Southwest could fight against this by having numerous amounts of fuel holdings. When the price starts to drop they can buy more of the cheaper amount of fuel and store it. They can then use this stored fuel when the price goes up.
Southwest is known as a company that is very efficient when loading people onto planes. They have a first come first serve when they are checking people in. If they are able to push their employees to getting the planes loaded faster, this will increase their ability to get the plane in the air faster.
WT Strategies
A large weakness and threat for Southwest is they don’t travel to all locations. They are limited as to their international flights and don’t travel to all locations in the United States. This does turn off people from choosing their service because since they don’t travel to those locations. Southwest to combat this concern should advertise and explain to people that they don’t travel to all locations to keep the prices down. If they were to travel to all these locations their prices will rise.
Going through this project I have to walk away from my family and go to a secluded area to work on it. There are at times when a business professional knows that they have a lot of work. They also know that one place they can work on without being interfered is on the plane. Unfortunately Southwest doesn’t offer a business class. Southwest should look at using larger planes that will have business class then charge more for those customers that want to sit in that section of the planes.
Strategy Selection
There were several different strategies that Southwest could look at in order to achieve better and stronger financial performances. The first strategy was making Southwest website easier to use. By doing this Southwest could help their customers in purchasing tickets and make it so they are a more reliable supporter. The second strategy was promoting capable employees. This would help promote their employees and show that they want to improve the company not only from within but also improve their credibility with their union management. But these strategies would not answer the initial case problem of increasing revenue and pleasing customers. The strategy that was ranked the highest in the QSPM was showing their customers that they belong in any seat. This strategy will give numerous benefits to Southwest. By doing this Southwest can utilize their advertising skills and show customers that are getting on their plane with several other types of customers. They could show business professionals getting on planes with a family that is going on vacation. All of these people could sit anywhere, could sit in any place and enjoy the ride.
Implementation Plan
Expanding the customers that use Southwest and letting them know that they can sit anywhere will be a struggle. Southwest’s current Chief Executive Officer is Gary Kelly and his management team has shown that they are very good innovators over the last several years. They are always staying ahead of the rest of the airline industry. There are several items that Southwest can do to implement this strategy and ensure that the strategy will succeed. The biggest struggle that Southwest will face in order to succeed is to get a celebrity that will be willing to be in the commercial.
Marketing
The marketing for Southwest has always been a leader in the airline industry. Southwest’s current chief marketing officer is Ryan Green and he will be the main person to go to in order to implement this strategy. Southwest will need to have numerous people beyond Ryan Green to accomplish this task. More than likely this should be done by some of Southwest’s more experienced employees that have worked well with making the current commercials. Southwest will also need to achieve some professional relationship with whichever celebrity that Southwest is able to get to be in the commercial.
Operations
There in not much that the operations team will have to do. The main thing that the operations team will have to do is supporting the marketing team. The operations team will be led by Alfred Smith whom is the current senior vice president of operations. Alfred will need to be able to supply any needed items such as planes, flight attendants, or pilots. Also the operations team should help with the promoting of the commercial. Specifically if they are asked by their customers if they were the one that was waiting on the celebrity how it was to interact with them.
Finance
The finance team will need to be heavily involved with the marketing team to ensure that they have everything they need. The finance team will be led by Southwest’s Chief Financial Officer Tammy Romo. Southwest could use debt, stock, or combination of both of them in order to obtain the necessary cost for the commercial. The major cost of this commercial will be getting the endorsement deal of the celebrity of their choosing. Currently Tom Brady makes about a $7 million a year for his endorsements (Chemi, 2015). The commercial with him may be a little higher than Southwest is willing to spend. Other celebrities vary on their pricing and what is being asked of them.
Below is an EPS/EBIT that will show which option will be best for raising the funds needed. It will be shown using the Tom Brady in the commercial.
- Amount Required – $2 million – cost of making commercial roughly $1 million nationally and 1 million for celebrity (Aland, 2017)
- EBIT range – $5 to $9 billion
- Interest rate – 5%
- Tax Rate – 37%
- Stock price: $56 per share
- Common stocks outstanding – 580 million
Common Stock Financing
Normal
Recession
Boom
EBIT
$5,000,000,000
$7,000,000,000
$9,000,000,000
Interest
0
0
0
EBT
$5,000,000,000
$7,000,000,000
$9,000,000,000
Taxes
1,850,000,000
2,590,000,000
3,330,000,000
EAT
3,150,000,000
4,410,000,000
5,670,000,000
# of shares
588,450,527
588,450,527
588,450,527
EPS
$5.35
$7.49
$9.64
Debt Financing
Normal
Recession
Boom
EBIT
$5,000,000,000
$7,000,000,000
$9,000,000,000
Interest
25,000,000
25,000,000
25,000,000
EBT
4,975,000,000
6,975,000,000
8,975,000,000
Taxes
1,840,750,000
2,580,750,000
3,320,750,000
EAT
3,134,250,000
4,394,250,000
5,654,250,000
# of shares
579,803,000
579,803,000
579,803,000
EPS
$5.41
$7.58
$9.75
Looking at the above graphs Southwest should use the Debt financing when they need to pay out for this commercial. Southwest will not accumulate a lot of debt when they do have to make this commercial as the cost of doing this is not that great. Although if Southwest wanted to utilize this more often and have more celebrities, this will only boost Southwest as a company.